Energy price drop costs city of Georgetown electric fund $6.84M

The 1,250-acre Buckthorn solar plant in Pecos County in West Texas began generating power in July. Operated by Clearway Energy, the Buckthorn plant includes 1.7 million solar power panels. Courtesy City of Georgetown

The 1,250-acre Buckthorn solar plant in Pecos County in West Texas began generating power in July. Operated by Clearway Energy, the Buckthorn plant includes 1.7 million solar power panels. (Courtesy City of Georgetown)

Georgetown officials will try to renegotiate the city’s renewable energy contracts and find other cost cuts after a late-summer drop in energy market prices lost the city’s utility $6.84 million.

The electric fund for Georgetown Utility Systems, or GUS, the city-owned utility that is the sole provider of electricity and water for more than 40,000 residents, is now projected to end at $1.97 million for the city’s 2017-18 fiscal year, which ended Sept. 30. The fund was initially projected to end at $8.81 million, according to a presentation of the city’s latest quarterly financial report by Georgetown Budget Manager Paul Diaz during a City Council policy workshop on Nov. 27.

City Manager David Morgan told council members that the decreased projection is due to the structure of the city’s long-term energy contracts and volatility in the energy market.

Georgetown’s renewable contracts include a 150 megawatt-hour-capacity deal with Clearway Energy’s Buckthorn solar plant in West Texas that started in 2018 and expires in 2043. A 144 MWh-capacity contract with EDF Renewable Energy’s Spinning Spur 3 wind farm, which is located near Amarillo, started in 2015 and ends in 2035.

The city has not disclosed the fixed rates that are included in the contracts. Texas open records law considers energy rates trade secrets and exempts their disclosure through public-record requests.

Morgan said the renegotiating process will take some time.

“As you might imagine, there’s significant complexities when you’re looking at renegotiating those types of contracts,” Morgan said during the Nov. 27 workshop. “They’re going to take several months to complete.”

Council members are scheduled to review details during another policy workshop on Dec. 11 on how the loss might be mitigated, including possible hiring freezes and halting new utility-related construction projects.

The council will also vote during its Dec. 11 regular meeting on a budget amendment to account for the electric fund shortfall.

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Shift in direction

The call for a new strategy is a stark departure from city messaging over the past year that Georgetown’s long-term fixed contracts with solar and wind power producers would be an economic win.

In order to secure lower fixed rates from the wind and solar power producers, Georgetown officials decided to buy more power than the city actually needed in the present to account for future growth and with the intention of selling any excess to buyers on the wholesale energy market.

Georgetown spent $53.6 million on power purchases in 2018, according to the city.

Jim Briggs, the city’s director of utilities, said in an interview that at the time the long-term contracts were negotiated, future market forecasts projected stronger energy prices. But the projection proved wrong.

“We bought into the projection,” Briggs said. “It didn’t materialize, and it went the other direction. For this year we’re forecasting a much more conservative approach.”

Briggs declined to speak specifically about the city’s investment strategy, but he said city staff is pursuing several options to reduce Georgetown’s market exposure and offset the losses.

“Our forte is not to play the market. That’s not our role as a municipally owned utility,” he said.

Briggs said the outcome would have been the same even if Georgetown’s long-term contracts had been made with nonrenewable energy producers due to the fact that the energy market’s price drop affected producers of all types.

“That posed problems for all resources. They all had to struggle with how to make the numbers work during the year. It really wasn’t the resource, whether it was renewable or nonrenewable,” Briggs said.

Moving forward

City Council Member Steve Fought, who serves on the GUS board of directors, said during the Nov. 27 policy workshop that a lack of real-time information on the fluctuation of energy prices puts the city at a significant disadvantage when trying to sell electricity on the open market. Fought said that should the city continue to sell on the market, the GUS board would benefit from adding another member with experience in energy trading.

Morgan said a new management strategy and new technology would be parts of “an aggressive plan to improve the condition” of the electric fund during the city’s fiscal year 2018-19 and into the future.

An FAQ recently posted on the city’s website included information that had not been previously reported by Community Impact Newspaper:

While Georgetown officials have said that since April 2017 the city has been “powered by 100 percent renewable based on the state’s system of accounting for renewable power based on renewable energy credits,” about 20 percent of Georgetown’s energy purchases come from a producer of natural gas power, which is nonrenewable, through a contract that expires in 2021. The city also has an additional contract with a smaller solar producer that ends in 2028.

The city initially had a partner in its contract with the Spinning Spur 3 wind farm, but the partner pulled out of the deal. Rather than nix the contract, city officials decided to cover the partner’s share of the contract and in doing so allowed the city to take advantage of federal tax credits to cut costs.

Briggs said potential changes to costs tied directly to the city’s long-term renewable contracts would not affect electricity rates paid by GUS customers.

However, if Georgetown does not reduce its exposure in the wholesale energy market and future price decreases occur, GUS customers could see an effect on their utility bills.

“It could have an impact on rates if we don’t take some form of action,” Briggs said.

Unrelated to the projected decrease in the city’s electric fund, the base rate for GUS electricity customers will increase by $4.80 on Jan. 1 in order to cover increased operating costs in the electric department, according to the city.

This story has been updated to reflect a change of ownership at the Buckthorn solar plant in West Texas.

I’m sorry, but not having a back up plan for “what if the market projections were off” was careless. This loss will have to be made up by higher costs to rate payers. Green energy is great, but let’s all be honest, the City wa so focused on being 100% green, they lost sight of the customer’s best interest.

Green energy is great. Agreed! But for a small, municipally owned electric utility to attempt to get out front of the renewable energy curve was imprudent. The results seem to bear this out.

In 2017 the amount of electric energy generated by wind for ERCOT was 17.4 percent. Less than one percent was generated by solar. The remainder was generated by natural gas, coal, and nuclear.

Electric energy cannot be segregated. Everyone gets roughly the same mix that flows through the grid. So, the mix of energy delivered to Georgetown Utility Systems’ customers would have been approximately the same as that delivered to everyone else in Texas.

I wonder if the mayor and the council members even understand this fact. None of the have any hands-on experience in the electric utility business.

Absolutely correct. I had said many times this “green commitment” was in name only. It wasn’t going to change a thing about from what commodity the energy was generated. Everyone on the grid gets the same mix. All they did was contractually tie themselves to the pricing on one part of the electric generation mix with no hedge, so now they have an unmanageable commodity risk. It’s really unbelievable that these elected officials could be so naïve. But I guess they got to schmooze with Al Gore for a few minutes.

“Fought said that should the city continue to sell on the market, the GUS board would benefit from adding another member with experience in energy trading.”

This is the crux of the problem. Lack of experience! Why did GUS not hire an experienced energy trader before leaping off the diving board into long-term wind and solar contracts?

No experienced financial planner would attempt to project the cost of a commodity over 20 to 25 years. I worked with energy traders for years. I never met anyone who believed you could forecast energy prices over 20 or more years with any degree of certainty.

Apparently, the Georgetown Utility Systems planners attempted to forecast customer growth and load demand over a 25-year period prior to or while buying into the long-term wind and solar contracts. But it does not appear that they attempted to forecast the prices for alternative fuels, i.e. natural gas, nuclear, etc. Or if they did, they won’t make their analyses available for public inspection. And apparently, they did not hedge the contracts.

It is true that the decline in natural gas prices affected every electric utility in the state. But the sophisticated players probably had their contracts hedged to cover such an eventuality. GUS’s claim that everyone suffered loses compared to those incurred by GUS is unsupported.

A sophisticated trading group would have hedged their contracts, none of which would have run for 20 to 25 years, to cover the steep decline in natural gas prices. There is no evidence that GUS hedged their contracts. Or even knew how to do it.

The claim that GUS was unaware of what was transpiring in the market for up to six weeks after the trends manifested themselves is suspect. ERCOT posts trading information online in real time. Moreover, the prices of nature gas, as well as futures, are easily obtainable in near real time. The only way to have missed the trends would have been to not pay attention to them.

Georgetown should sell its poles and wires to a large operator that could use its size to leverage a better outcome for the city’s residents. At a minimum it should open the local market to competition. If these guys had to compete, as is the case in most of the communities surrounding Georgetown, they might have played a better game.

Clearly the city stepped into an area that is way beyond their area of expertise. We now know that nonrenewable energy is available within the US for more than a century going forward. Poor job by the City Council and Staff, should be no raises or bonuses for this mess up.

“Unrelated to the projected decrease in the city’s electric fund, the base rate for GUS electricity customers will increase by $4.80 on Jan. 1 in order to cover increased operating costs in the electric department, according to the city.”